The end of ISA season is a great time to set goals for the upcoming financial year. But what are the benefits of a long term outlook on investing?
“For many of us, it’s natural to want to get rich quickly, however it’s important to remember that investing is an inherently long-term game,” says Adrian Lowcock, head of personal investing at Willis Owen. “When you invest in a company, you are becoming an owner of that business, and sharing in its successes and profits, but you can also expect market downturns. When you have a long-term strategy, short-term fluctuations shouldn’t weigh too heavily on your overall returns.”
Below, Lowcock outlines the benefits of a long-term investing outlook.
Taking a long-term perspective can make you less emotional. With technology has come the ability to look at our investments around the clock, but you don’t have to worry about making a profit or loss in the next day or week, and potentially lose sleep over the outcome.
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Emotions can lead us to make snap decisions that can impact our individual goals. Investing for the long run means you don’t need to worry about the daily movements in share prices and instead can focus on the bigger picture.
More time efficient
Trying to predict the short-term movements of share prices is hard work. Traders often spend hours poring over charts to identify which stock is going to rally in the short-term and which isn’t. Day trading can work for some of us, but it’s rarely the best way to make money. Many investors rush to buy shares when they fall in price, but more often than not, new information has come out which changes the outlook for the company.
Good investment ideas are not as common as one might think, but once you have found them, most of the groundwork is done.
You can start small
You can start investing with small amounts of money by investing in a fund and topping up your investments each month to build your portfolio over time. The trick is to think about what you are saving for over the next ten or fifteen years and implementing a strategy to achieve your goals.
Reduces the risk of loss
One of the main issues people are concerned about is that they might lose their money. The reality is the value of an investment may fall and you can get back less than you invested.
However, if you hold a diversified portfolio, then the likelihood of losing money falls the longer you remain invested. Historically, markets have rallied to high levels, although past performance is not a guide to the future.
Cut your costs
Long-term investing can also help you cut costs. Trading shares can be expensive as each time you buy or sell a share there are transaction costs and stamp duty rates that impact the long-term returns you can expect.
By trading too frequently you are generating fees for your stockbroker and therefore profit for someone else, whereas a long-term outlook can help you manage the overall cost of investing.
Make the most of compounding
It is believed Albert Einstein once described compounding as the eighth wonder of the world. Compounding allows you to earn money on your savings and when you reinvest that, you earn even more money on it.
For example, £1,000 invested, excluding charges, growing at 5% per annum, will deliver £50 each year. Over 30 years that would be £1,500. If that money is reinvested each year instead, the return is £3,322*. That’s more than twice the return on the same investment from compounding alone.
“There are many options for investors, but we believe taking a long-term approach is likely to be the simplest and most successful approach for generating above-inflation returns,” Lowcock concludes.
*Source: Willis Owen, Return excludes any costs and the initial investment.